December 2012 Equity Market Review
By Natalie Trunow, Chief Investment Officer, Equities, Calvert Investment Management, Inc.
Despite fiscal cliff negotiations dragging on to the last minute, improving macroeconomic data in the U.S. and the continued global easing cycle provided support for equity markets globally in December. For the month, the Russell 1000, Russell 2000, MSCI EAFE, and MSCI Emerging Markets Indices returned 1.04%, 3.56%, 3.21%, and 4.90%, respectively. Value stocks outperformed growth stocks, and within the Russell 1000 Index, Financials, Materials, and Industrials were the top-performing sectors for the month, while the Consumer Staples, Telecommunication Services, and Health Care sectors lagged.
Hurricane Sandy continued to weigh on the manufacturing sector with the Empire State Manufacturing Index declining further into contraction territory in December, though the survey revealed a more positive outlook for the coming months. At the same time, the ISM National Manufacturing Index rebounded more than anticipated in December, and orders of durable and capital goods increased more than forecast.
Vehicle sales remained strong, which helped drive an increase in consumer credit, and the housing market continued to recover with home prices in the U.S. rising on an annual basis in 2012 for the first time since 2006. The labor market continued to improve as the unemployment rate dropped to 7.7%, the lowest in four years, while third-quarter GDP was revised up to 3.1% annualized growth.
Congress reached a deal at the last minute to avoid going over the "fiscal cliff," allowing the payroll tax cut to expire and postponing most spending cuts for two months. Though the initial response by market participants to the deal was positive, a tough road lies ahead for policymakers with negotiations around the debt ceiling picking up and entitlement reforms yet to be addressed. The political dysfunction led to a sharp decline in consumer confidence during the month, and early data suggested holiday retail spending data may be weaker than expected.
The fiscal drag and recession in the eurozone continued to be worse than anticipated as the European Central Bank (ECB) revised its 2013 GDP forecast from 0.5% expansion to 0.3% contraction, and Germany's central bank lowered its 2013 growth forecast from 1.6% to 0.4%. At the same time, the proposed Greek bond buy-back program continued to move along during the month with market participants responding favorably.
China's economy continued to show signs of stabilizing in December as its manufacturing PMI remained in expansion territory and year-to-date industrial profits were up, contributing to a rally in Chinese stocks during the month.
We believe 2013 could be another good year for equity markets, despite the political dysfunction in Washington. This time, however, in addition to attractive, positive returns in equities, we may also see positive asset flows as retail and institutional investors gain further confidence in the U.S. economic recovery and improvements in the labor and housing markets, reversing a multi-year trend of outflows from equity funds. Unfortunately, the new flows may be reallocations from other asset classes and not necessarily come from investors' cash positions, as risk aversion is still relatively high among investors. In fact, if we see an inflection point in fixed income performance in 2013, causing bond returns to turn negative, investors may be less willing to reallocate cash to risky assets; however, we think equities may still attract incremental flows.
With the global macro picture becoming less treacherous, value discipline gaining traction in the marketplace after a multi-year hiatus, and small-cap stocks picking up in performance, we believe that active managers will be in a better position to add value in 2013, reversing a painful multi-year trend of underperformance by active managers. We expect the consumer sector to continue to drive the recovery in the U.S. in 2013, while the manufacturing sector could regain its strength in the second half of the year.
This commentary represents the opinions of the author as of 1/7/13 and may change based on market and other conditions. These opinions are not intended to forecast future events, guarantee future results, or serve as investment advice. The statistics have been obtained from sources believed to be reliable, but the accuracy and completeness of this information cannot be guaranteed. Neither Calvert Investment Management, Inc. nor its information providers are responsible for any damages or losses arising from any use of this information.
Accounts managed by Calvert Investment Management, Inc. may or may not invest in, and Calvert is not recommending any action on, any companies listed.
Calvert Investment Management, Inc., 4550 Montgomery Avenue, Bethesda, MD 20814